The energy crisis in Europe, the decline in the value of exports and the increase in the value of imports, as well as high expectations for interest rate hikes in the United States, may push the EUR/USD exchange rate ever more boldly towards 1.00.
It now appears that the risk of a recession in the Eurozone compared to the United States is much greater than previously thought. The Eurozone could fall into stagflation, just as happened to the US economy in the 1970s-80s. What's more, Europe needs more dollars to import goods, especially energy resources, than it can get through exports. However, the situation becomes even more difficult as the Nord Stream 1 gas pipeline will be closed from today due to previously planned maintenance work. However, there is a risk that it will not open by the July 21 deadline as previously planned. Russia could use the maintenance work and its possible prolongation to blackmail Europe's energy. This, in turn, could throw the economy into big trouble and ultimately into recession. It will no longer be so much that gas will be expensive, but that it simply won't be there, which could limit production capacity and could lead to a sharp decline in economic growth. This could have a negative impact on the euro's valuation.
Meanwhile, in the United States, the earnings season will begin this week, but inflation data will also be released. Already on Wall Street, PepsiCo will present its report on Tuesday, Delta Air Lines on Wednesday, JPMorgan Chase and Morgan Stanley on Thursday, and Wells Fargo, Citigroup and PNC Financial on Friday. Second-quarter earnings for the S&P 500 are expected to rise 5.7 percent, according to Refinitiv.
U.S. inflation could rise to 8.8 percent, which would be the highest reading since December 1981, but core inflation is expected to slow for the third consecutive month from 6 percent to 5.8 percent.
That, however, may not set back market expectations for a 0.75 percentage point rate hike overseas at the July meeting. Also, the fact that the yield curve is starting to invert again in the US, where interest rates on 2-year bonds appear to be higher than on 10-year bonds, may therefore not undo Fed policymakers' decision to raise interest rates further. In their view, inflation is mostly demand-driven, not energy costs. Raising interest rates could cause demand to be reduced, and U.S. consumers may start saving more than spending, which also threatens a U.S. recession.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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